States Unintentionally Threaten Online Advertising for Small Websites and Blogs

April 15, 2009

What happens when states pass cyber laws they don't fully understand? In the case of the so called "Amazon Laws", states such as Rhode Island and North Carolina have unintentially eliminated a source of revenue for small web businesses within their borders.

The Best of Intentions

The "Amazon Law" started with the desire to provide an even playing field for local brick and mortar businesses by requiring people to pay sales tax for online purchases. This has proved difficult because a state cannot normally require a company to collect sales tax unless the company has a presence in a state such as a store or office. But then along came a new form of advertisement called affiliate advertisement (A.K.A. commission-based advertisement.) Lawmakers fixated on the "affiliate" portion of the name and ran with the flawed assumption that online sales needed to pass through affiliates in the much the same way that brick and mortal sales pass through local stores and offices. They created the "Amazon Law" which reasoned that if a retailer used an affiliate advertiser in their state, then they were considered to have operations in that state, and were thus required to collect sales tax.

No Borders on the Internet

Because there are no borders on the web, retailers can easily side-step "Amazon Laws" by cutting ties with affiliate advertisers in states where the law is in effect. The strategy works because affiliate advertisers are just that - advertisers, who place advertisements on their own websites and are compensated by retailers when visitors are referred by the ads and make a purchase. So retailers can simply shift their advertisement contracts to websites from another state, or they can market their products directly. The result is that they can continue sell products within the state while avoiding the obligation to collect sales tax.

Unintended Consequences

Not surprisingly the states that passed the "Amazon Laws" have failed to collect sales tax from online retailers and the uneven playing field for brick and mortar businesses continue. But unfortunately the lesson doesn't end there for states that passed the "Amazon Law". In doing so they have introduced an unintended consequence - small websites and blogs have lost their revenue when retailers dropped them as affiliate advertisers. So not only did states fail to raise sales tax, but they actually lost income in tax revenue.

Monkey See Monkey Do

Other states are now jumping on the bandwagon and considering their own versions of the "Amazon Law" without fully understanding affiliate advertising and how this type of legislature has devastated website revenue, particularly with small websites where affiliate advertising has been the fastest growing segment of the online ad industry. This is because affiliate advertising is particularly advantageous to small websites where success favors quality rather than quantity of traffic. In other words, fifty clicks by motivated buyers from a small specialty site can be worth more in sales to a retailer than 5,000 clicks of the mildly curious from a mass-media site. Thus the affiliate model helps place small sites on equal footing with larger ones because it takes the emphasis off of unique visitor and page view statistics - retailers don't need that information when they are only paying for actual sales results. So thanks to Affiliate Advertisement, smaller content publishers with great content can generate significant revenue and get major companies such as Ebay, Amazon, and Apple to advertise on their websites.

The Ends Do Not Justify the Means

Unfortunately the thirst for taxing online sales tends to overshadow everything else, and it is used to justify any approach no matter how impractical or potentially harmful. Should online buyers pay sales tax? They already do if the retailer has a presence in their state. However the requirement of a state presence creates inconsistencies and contributes to an uneven playing field where all brick and mortal retail must collect sales tax while only some online retailers have the same responsibility. But using Affiliate advertisement as a way to claim a retailer presence in a state is the wrong approach. The logic here is questionable because affiliate advertisers are simply that - advertisers - with a new way of getting compensated for their efforts. If states want to encourage the growth of small business, they should protect, rather than destroy the means of revenue for thousands of small websites and blogs.